U.K. Labor market cooling, Australia’s hot employment data, U.S. end of rate hike cycle, BOE and ECB rates kept steady, Interest rate cut talks shake markets

PREVIOUS WEEK’S EVENTS (Week  11  – 15 Dec 2023)

Announcements:

U.K. Economy

The Labor market report for the U.K. was released last week suggesting that the British wage growth slowed by the most in almost two years and the Claimant Count Change was reported less than expected but higher than the previous figure. Labour market cooling is what the MPC wants to see at the moment, however, leaving interest rates high for longer is more possible.

The Bank of England (BoE) raised interest rates 14 times in a row between December 2021 and August 2023. It has since kept rates on hold.

In Britain, the services sector saw another pick-up in growth this month, enough to possibly avoid a recession.

Australia Economy

Australia’s employment figure far outpaced expectations for a second month in November showing a surprisingly higher employment change. Net employment jumped remarkably by 61.5K in November from October. The unemployment rate rose, however, to 3.9%, the highest reading since May last year, from an upwardly revised 3.8% in October.

The Federal Reserve is signalling rate cuts in the year ahead.

Eurozone Economy

The downturn in Eurozone business activity deepens to critical levels according to surveys, indicating that the Eurozone is almost certainly in recession. Reports showed that activity is deteriorating in both Germany and France and across services and manufacturing. We have two consecutive quarters of economic contraction, meeting the technical definition of recession in the Eurozone.

U.S. Economy

The U.S. saw an increase in manufacturing sector output with mixed figures for different categories in November and the economy continued to expand as the year ended. The PMI survey showed business activity picked up in December amid rising orders and demand for workers in the services industry.

The broader economy keeps growing, though manufacturing continues to deteriorate. The survey from the Institute for Supply Management this month found that manufacturers viewed customer inventories as having increased “toward the upper end of ‘about-right’ territory” in November. The ISM’s manufacturing PMI has remained in contraction territory for 13 straight months, the longest such stretch since the August 2000-January 2002 period.

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Inflation

U.S.

The November Consumer Price Index (CPI) rose 3.1% on an annual basis, in line with the estimated figure. Core inflation, excluding volatile items such as food and energy costs, also matched expectations, showing a 4% annual rise.

The market’s view is that inflation is going to keep declining and that the Fed is going to cut rates next year, counting on more of a soft landing.

The PPI data were reported last week suggesting no change in U.S. producer prices in November amid cheaper energy goods. The related report also showed that services prices remained flat for a second straight month, boosting optimism that overall inflation would continue to subside.

Though inflation remains above the Fed’s 2% target, price increases are less broad-based.

“This report provides another good news for the Fed’s fight to return inflation to 2%”

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Interest Rates

FED

The dollar suffered a significant drop after the Federal Reserve (FED) kept the Fed Rate unchanged and indicated that its interest-rate hike cycle has ended and that lower borrowing costs are coming in 2024.

Fed Chair Jerome Powell said at Wednesday’s Federal Open Market Committee (FOMC) meeting that tightening of monetary policy is likely over, with a discussion of cuts in borrowing costs coming “into view”.

Expectations that the Bank of Japan (BOJ) could end negative interest rates at its monetary policy meeting on Dec. 18-19 have largely died down.

Other Central Banks

The Bank of England (BOE) and the European Central Bank (ECB), held borrowing costs steady and pledged to keep monetary conditions restrictive as long as necessary. ECB and BOE are reluctant to cut rates, a more tightening view than the Fed.

Eurozone inflation tumbled more than expected to 2.4% in November, while in Britain it slowed to 4.6% in October, also lower than expected. ECB president Christine Lagarde said “underlying” price pressures were moderating more than the ECB expected.

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Sources: https://www.reuters.com/world/uk/uk-regular-wages-grow-by-73-3-months-oct-2023-12-12/

https://www.reuters.com/world/asia-pacific/australia-employment-surges-nov-jobless-rate-hit-1-12-year-high-2023-12-14/

https://www.reuters.com/markets/europe/euro-zone-business-activity-declines-further-dec-pmi-2023-12-15/

https://www.reuters.com/markets/us/us-manufacturing-output-rises-november-2023-12-15/

https://www.reuters.com/markets/us/futures-edge-higher-with-all-eyes-inflation-data-2023-12-12/

https://www.reuters.com/markets/us/us-producer-prices-unchanged-november-2023-12-13/ https://www.reuters.com/markets/currencies/dollar-takes-dive-after-fed-signals-rate-cuts-next-year-2023-12-14/

https://www.reuters.com/markets/rates-bonds/global-markets-central-banks-analysis-pix-graphics-2023-12-14/

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Currency Markets Impact – Past Releases (Week  11  – 15 Dec 2023)

Server Time / Timezone EEST (UTC+02:00)

U.K. Claimant Count Change (unemployment benefits) was reported lower than expected. The estimated number of vacancies in the UK fell by 45K in the quarter. No significant impact was recorded in the FX market upon release. Annual growth in regular pay (excluding bonuses) in the U.K. was 7.3% from August to October 2023. Annual growth in employees’ average total pay (including bonuses) was 7.2%. The market reacted with a moderate shock that caused the GBP to depreciate initially but the effect soon faded. At around 9:30, on 12th Dec, the GBP started to show depreciation again causing the GBPUSD to drop more than 30 pips during that time.

The U.S. inflation rate data was released last week causing volatile market conditions. The Core CPI monthly change was reported higher and as expected while the CPI monthly change overall was reported 0.10%, higher than expected. Nevertheless, the yearly calculation was reported to be 3.10%, lower and as expected. The market reacted with USD depreciation at first followed by a quick and long appreciation.

Monthly real gross domestic product (GDP) is estimated to have experienced a negative change of -0.30%, a more negative figure than the one expected, in the three months to October 2023, compared with the three months to July 2023. The market reacted with GBP depreciation at the time of the release on the 13th Dec.

The U.S. inflation-related figures, PPI data, were released showing no change, 0%. The Core PPI data was unchanged from the previous figure while the PPI change improved to 0% instead of negative. The data suggest that price increases in the economy’s pipeline are continuing to gradually ease. No major impact was recorded at the time of the release.

The FOMC statement and Fed rate announcements took place on the 13rd Dec causing high volatility and one-sided direction movement for USD pairs and other related assets. As expected, the FOMC kept rates unchanged signalling that they are most likely done raising rates. Rate cuts were again brought to the table. They increased the guiding on rate cuts next year from 50bps to 75bps, clearly more than most analysts expected. The statement highlighted that economic activity was clearly weaker than in the third quarter. The market reacted with strong USD depreciation at the time of the release. EURUSD jumped near 100 pips, Gold moved rapidly upwards reaching near 58 USD movement with no retracement and Silver reaching near 13 USD keeping a similar path. U.S. indices also experienced an upward movement that lasted quite long until the next day, 14th Dec, when they faced resistance to the upside.

In New Zealand, the change in GDP in the September 2023 quarter, was reported negative, -0.30%. The NZD was depreciated against other currencies at the time of the release but the effect soon faded.

On the 14th Dec, during the Asian session, Australia’s labour-related data were released showing that employment change was reported higher than expected, however, unemployment hit a 1-1/2 year high. The market reacted with steady AUD appreciation against other currencies since the report’s release.

The Swiss National Bank (SNB) kept the SNB policy rate unchanged at 1.75%. The market reacted causing high volatility for CHF pairs, an up-down effect, keeping them close to the mean (30-period MA).

The European Central Bank (ECB) and Bank of England (BOE) also kept their interest rates steady. BOE held its policy rate at 5.25%, as expected by all economists and markets. The GBP started to appreciate steadily against other assets after the announcement. ECB kept its policy rate at 4.5% as widely expected. There was no major impact in the market at the time of the release but during the press conference, the EUR appreciated moderately against other currencies.

Retail Sales and Unemployment claims figures for the U.S. were released on the 14th Dec as well. The report showed that retail sales performed much better than expected in November. The labour market also remains tight. Jobless claims were reported lower than expected but again close to the 200K mark. No major impact on USD pairs at that time.

Industrial Production measure, a yearly change figure for China, was released showing an increase. Retail sales were also reported higher. The CNH and AUD were slightly appreciated at the time of the release but no major impact was recorded.

Manufacturing and Services PMIs Releases:

Eurozone PMIs

The French business activity fell at the fastest pace for over three years as PMI reports suggest. The Manufacturing figure was reported to be just 42, lower than the expected 43.3. The decrease in output accelerated for the first time since September and was the steepest since November 2020. The period of decline started at the midway point of the year. Services PMI also reported lower than expected 44.3 points versus the expected 46.

Germany reported the expected low figure of 43.1 points for the manufacturing sector and 48.4 points PMI for the services sector, with manufacturers and services firms each recording slightly faster declines in business activity. It ended the year with a further fall in business activity and a rise in output prices.

Eurozone’s PMIs suggest that activity fell at an increased rate in December, closing off a fourth quarter which has seen output fall at its fastest rate for 11 years. Both business sectors reported further steep falls in inflows of new business, which led to a further depletion of backlogs of work. Jobs were cut for a second month. Book orders worsened.

United Kingdom PMI

In the U.K. the private sector output growth edges up to a six-month high, led by a faster recovery in the service economy. The PMI for the manufacturing sector was reported to be in the contraction territory, however, the services sector PMI was reported to be 52.7 points in the expansion territory. The reports showed higher levels of business activity supported by a renewed improvement in order books.

United States PMI

The reported PMI figures for the U.S. are signalling better conditions in general and for the services sector specifically which experienced expansion, with a recorded PMI of 51.3. A slightly stronger business activity close to 2023 as activity rose at the fastest pace for five months in December. The business sector experienced the sharpest increase in new orders since July. Growth was driven by the service sector, as manufacturers registered a further downturn in new orders and a renewed drop in production.

The market reacted with EUR depreciation upon the PMI releases, for the related economies. All figures and reports showed that contraction in business activity is continuing at a dangerous pace. The U.K. PMI’s release caused the GBP to appreciate at that time instead but the effect soon faded. The USD experienced appreciation and eventually gained a lot of ground against other currencies.

According to the Empire State Man. index report, the headline general business conditions index fell twenty-four points to -14.5, a figure showing that business activity declined in New York State significantly. New orders were down, and shipments also declined. Inventories moved lower. Employment declined modestly, and the average workweek edged down.

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FOREX MARKETS MONITOR

Dollar Index (US_DX)

The dollar suffered strong depreciation last week due to the FOMC statement and Fed rate announcements that took place on the 13rd Dec causing high volatility and one-sided direction movement for USD pairs and other related assets. As expected, the FOMC kept rates unchanged, indicating that hikes are over and rate cuts are coming into effect soon. The dollar index dropped rapidly and found resistance close to 101.8 before retracing back near the 61.8 Fibo level as depicted on the chart.

EURUSD

The pair obviously was driven mainly by the USD. It moved on the path as set by the USD depreciation that started to take effect greatly on the 13th Dec after the FOMC news. The pair jumped higher and higher until it found resistance near 1.10. It then experienced a retracement of even more than the 61.8% of the previous long upward movement while the dollar was appreciating against other currencies correcting from the previous “negative” effect.

CRYPTO MARKETS MONITOR

BTCUSD

Bitcoin fell significantly as 41500 was a critical support. We see that eventually due to low volatility, the price formed a triangle that was broken today after the price of bitcoin experienced this huge drop, reaching near 40700. A correction phase is the cause, most likely.

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NEXT WEEK’S EVENTS (18 – 22.12.2023)

This week the Bank of Japan (BOJ) is deciding on interest rates on the 19th Dec and estimated that there will be no change keeping them negative.

We have inflation-related reports for Canada, the U.K. and the U.S.

Currency Markets Impact:

On the 19th Dec, the BOJ is expected to release their interest rate decision early during the Asian session. Probably the JPY will be affected at the time of the release but only moderately.

At 15:30 the inflation-related data for Canada, CPI changes, are going to be released causing a potential negative impact on CAD The market is expecting lower figures as interest rates remain high for now.

On the 20th Dec, the inflation-related figures for the U.K. are going to be released causing volatility and potential one-sided movement for the GBP

At 17:00 the CB Consumer Confidence report release could shake the USD pairs but not with an intraday shock. Volatility could be increased to moderate levels.

On the 21st Dec, at 15:30 CAD pairs could see intraday shock at the time of Canada’s retail sales figures release and at the same time the USD pairs could be affected greatly by the GDP and Unemployment Claims report.

The PCE Price index figure on the 22nd probably will cause intraday shock for the USD pairs as it is an important figure related to inflation. It is released with the Durable Goods orders reports and the market could see volatility levels to rise moderately at that time.

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COMMODITIES MARKETS MONITOR

U.S. Crude Oil

Crude moved upwards last week after central bank news and statements. The USD also experienced further weakening. Its price eventually reached 72.5 USD/b which served as a critical resistance level. This level was tested many times without a breakout. The path eventually remained sideways, experiencing high volatility and consolidation, however today the price seems to test the low at near 71 USD/b.

Gold (XAUUSD)

With the FOMC and Fed Rate release the dollar had depreciated greatly enhancing the upward path. Gold jumped until it reached the resistance at 2040 USD/oz and remained settled, around that level. The RSI signalled a bearish divergence and eventually price fell as indicated to the 61.8 Fibo level as depicted on the chart. It remains stable for now near 2020 USD/oz.

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EQUITY MARKETS MONITOR

NAS100 (NDX)

Price Movement

Risk-on sentiment as market participants are pushing U.S. stocks higher and higher. NAS100 and other indices are clearly on an uptrend. This month has been good for stocks especially since the Fed is discussing rate cuts, thus future lower borrowing costs for businesses. During the FOMC news, their statements caused huge volatility in the market causing the indices to jump. After the retracement that took place on the 14th Dec, the market still is bullish and is reaching the highs again. Volatility levels seem to drop, forming a triangle, with the obvious important resistance level at near 16700 USD.

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